Boosting domestic demand

Boosting domestic demand

BUDGET 2016-17

Budget 2016-17 was an anxiously awaited event especially in the backdrop of the world economy staring at a crisis like situation and the domestic economy showing  structural weaknesses such as overall slowdown in demand, decreased credit off take, stressed banking sector, slowdown in investment and negative exports growth.

Therefore, everybody waited curiously for the budget to deliver on public investment to boost the domestic demand and take steps to ease of doing business. That’s exactly what Finance Minister Ar-un Jaitley has done by announcing a balanced and a pragmatic budget but focu-sing on real issues without any big bang.

The budget makes a clear statement that it is time to boost domestic demand. Given the uncertainty in the world economy led by China, India needs to secure and sustain its growth trajectory and this can be done only through sustaining its domestic demand. There is overall slowdown in demand in the economy, less than expected private investment, low credit off take, and excess capacity in industry. Therefore, Jaitley’s budget focusing on infrastructure and rural development needs to be complimented.

The huge budgetary allocation to both the sectors will help the stressed rural economy and propel demand in the months to come. History shows that the biggest infrastructure development projects are executed in an economy during slowdown.

Therefore, allocation of Rs 97,000 crore for roads and highways including PMGSY is the most productive way to create physical infrastructure which would reduce trade and transactions cost and boost demand. If somebody adds the allocation for railway infrastructure, all together the proposed investment is more than Rs 2.18 lakh crore, which is a substantial number in recent years. Leave alone railways, the total allocation for infrastructure sector such as road, ports, airports, power etc stands at Rs 2, 21,246 crore.

Apart from the major infrastructure sectors like road, ports, airports etc, the budget has made good provisions such as allocating Rs 80 lakh per gram panchayat amounting to about Rs 2.25 lakh crore, Rs 38,500 crore for MGNREGA and Rs 35,984 crore for agriculture which will create rural infrastructure like irrigation, water conservation, local sanitation and connectivity etc.

The allocation of Rs 60,000 crore for recharging ground water for water conservation and Rs 20, 000 crore to NABARD for irrigation will certainly help agricultural sector and give stability to farming community to farm.

Given the uncertain monsoon in last two years, the most crucial infrastructure for the rural economy, which is predominantly agricultural in nature and absorbs more than 50% of total labour force, is irrigation. Along with physical connectivity through roads and railways, the emphasis on rural infrastructure like irrigation, power and water conservation compliments overall development strategy for sustaining demand and growth.

Further to big announcements on agriculture, rural development and infrastructure, budget has also taken some specific steps which would complement poorer and disadvantaged sections. Some of the noted ones are cooking gas to BPL families, health protection scheme for every family and senior citizens along with dialysis facilities at district hospitals, scheme for promoting entrepreneurship for SC/ST and skill development centres. Basically, the government is back to basics - strengthening the rural economy and giving boost to aggregate demand.

Ease of doing business

The second important expectation from the budget was the ease of doing business. Though India moved up four spots in the global rankings for ease of doing business released by the World Bank in October 2015, much more is desired on ground. Jaitley has done a reasonable job on ease of doing business.

One of the main features is the proposal to amend Companies Act which will be introduced in the next session of Parliament. Company registration would be enabled in a day. The amendment to the companies act is necessary for government flagship programmes such ‘Make in India’, ‘Startup India’, ‘Skill India’ etc.

About 50 amendments to the Companies Act dealing with crucial aspects of business such as definitions, raising capital, audit, governance, management, penalty etc, have been proposed by a high level committee set up by the government. Some of the major announcements for ease of doing business are dispute resolution mechanism for public-private partnership in infrastructure sectors, additional tax tribunals, and introducing Bankruptcy Bill.

Another step is the flexibility provided to shops to keep their shops/firms open seven days a week to promote their businesses. A 100% FDI in food processing industry through the FIPB route along with companies, fighting their retrospective taxes, for a one time settlement is also part of the budget. 

The good thing about the budget is that it has stuck to its fiscal consolidation plan and pegged the fiscal deficit at 3.5% which will give space to RBI to cut policy rates. That would further release liquidity into the system and help domestic demand. Though all the proposed spending on infrastructure, rural development, social sector are welcome steps, government needs to make sure that the delivery system is efficient to improve the supply side.

Otherwise, simple flowing money may result in demand-supply mismatch in some sectors leading to CPI inflation. There is not much for middle class in terms of tax concessions though hike deduction on rent amount will marginally help some sections of the population.

Rather, there are additional cesses on different products and income categories. Basically, rich and middle class need to pay for development which is acceptable. I wish the government had introduced measures to increase the tax base rather than on focusing on the existing base. Budget missed on some important sectors such as no incentives for export sector which has shown negative growth for last one year and inadequate capital (Rs 25,000 crore) for the bleeding banking sector.

However, Jaitley had a tough job of managing fiscal deficit and giving a big push to the rural economy which was in distress. No doubt, the budget is balanced and addresses the needs of the Indian economy at present.

(The writer is Associate Professor, Institute of Economic Growth, University of Delhi)